More Fun and Games with High Finance

For those of you who weren’t bored to tears by my Friday posting, here’s a link to a handy chart that tracks the Fed’s “Temporary Open Market Operations.” The Fed implements monetary policy in part by performing these “Market Operations,” whereby they sell or repurchase securities that are turned into money. In essence, when they sell these securities, they are creating money (and inflation to boot), whereas when they repurchase these securities, they are removing money & liquidity from the system and driving inflation down.

According to the Fed’s policy, they buy & sell these securities to try and keep inflation in check… they don’t want the economy to get too hot & hyperinflate, nor do they want it to get too cold and deflate. They want things juuuuust right. Sound like a fairy tale? Well, it is. Last week alone, the Fed created over 47 billion dollars in new money, and that’s just an average week. They haven’t repurchased any securities since Mid-July (and probably not for a while before then). Since July 17th, they have injected roughly 182 Billion dollars into the US money supply.

It’s handy to keep this chart bookmarked, for you’ll see that anytime the market wobbles, you’ll generally see the Fed ratchet the printing presses up to full speed for a while and inject large amounts of liquidity into the markets. Taking a look at this chart, you’ll see a huge uptick in M1 (actual money in circulation) just after the 9/11 attacks. This is part of the operations of the so-called “Plunge Protection Team” – a group of government types and bankers who are authorized to more or less rig the stock market whenever it gets into serious trouble. John Crudele of the NY Post has been digging into their operations in a series of columns over the summer… very interesting stuff. If nothing else, the next time you hear some economist or politician prattling on about how wonderful the ‘open market’ is, remember that it’s not nearly as open as you might think.

One area I’ve failed to mention so far is the government’s decision to stop publishing the numbers for the total money supply, otherwise known as M3. The official reason given is that the number is irrelevant. Conspiracy theorists and cynical economics reporters think that there’s an ulterior motive: to mask the monetiziation of US Debt. M3 represents the total circulation of dollars worldwide. When it ceased being published in early 2006, there were around 11 trillion dollars slushing around banks worldwide. While the Fed is officially prohibited from engaging in debt monetization, cranks worldwide think that if China, Japan, et al stop buying US debt in significant volumes that the US will secretly buy the debt back with newly-created dollars, thereby diluting the purchasing power of dollars, and once again destroying the value of the savings of anyone who’s got money in the bank. This article has a little more insight…

Will this happen? I have no idea. I certainly wouldn’t put it past anyone though. In times of crisis, the government will do what is necessary to save itself, and simply flooding the market with dollars is an undercover way to mask the fact that the country is bankrupt. Much less gauche than outright repudiating our debts. Either way, the signs are aligning for a rough ride over the coming decade. As always, the question is ‘when’, not ‘if’.